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Indonesia Banks Chase Microloans – WSJ.com

Lenders See a Huge Opportunity to Expand Reach and Boost Earnings

By ERIC BELLMAN

SUBANG, Indonesia—Top banks in Indonesia are rapidly rolling out hundreds of microlending branches across the archipelago in the latest push by financial institutions to expand their reach—and boost earnings—by serving the less affluent.

Microfinance services usually are handled through charitable groups, government programs and specialty-finance companies, such as Grameen Bank in Bangladesh.

But in Indonesia, the country’s biggest banks, including Bank Mandiri and Bank Danamon, are powering growth in the market, which they say is under-served and lucrative.

“The potential in this market is huge,” said Minhari Handikusuma, a director at Danamon who is spearheading its push into microlending. Danamon figures more than 60% of small businesses in Indonesia, or more than 50 million entrepreneurs, aren’t served by the country’s banking system.

Bank Mandiri’s micro branch in Subang in West Java is small, with simple furnishings and just five employees, to make borrowers feel at home.

Microlending has expanded too quickly in some places, such as India, triggering a backlash and debt crises. That hasn’t snuffed out global enthusiasm for the business. The latest moves also point to a new driver of investment in Indonesia, one of the world’s largest developing economies.

Despite Indonesia’s impressive expansion for the last three years, the country’s ratio of loans to gross domestic product, a measure of how widely cash circulates in the economy, remains below 30%. That is lower than any other country in Asia. Singapore, Malaysia and China are all above 100%.

Some Indonesian banks have remained reluctant to lend after the Asian financial crisis of the late 1990s, and many don’t have a nationwide branch network to reach potential borrowers.

But as the global buzz about microlending increased since Muhammad Yunus was awarded a Nobel prize in 2006 for his pioneering microfinance work, Indonesia’s urban banks experimented and found that microloans gave them net interest margins—broadly the difference between yields on loans and the cost of funds—of close to 10%. That is more than three times the money they earn on some corporate loans.

For all banks in Indonesia, the total amount of microloans has surged 75% in the past five years to more than $30 billion.

The microlenders chose to focus on lending directly to individual entrepreneurs, unlike Grameen-style lenders that usually lend through women’s groups.

They also chose to focus on rural town markets with hundreds of businesses in one spot, rather than dealing with the costs of going to far-flung villages, as many microlenders do.

Nonperforming-loan levels have been low in Indonesia and the revenue flows have been more stable than regular lending. When demand for corporate loans dried up in 2008 and 2009, the micro sector kept expanding.

To reach out to poor entrepreneurs, though, banks rewrote their rule books.

Mandiri’s branch near the Ciasem market in Subang, West Java, for example, is run by five people, compared with 20 in a regular branch. It is the size of a two-car garage with simple plastic furniture and desks. Its vault is a room with a steel door and padlocks.

Keeping the branches basic saves money and helps customers feel at home, said branch manager Suhedi, who like many Indonesians uses only one name.

Loan forms were simplified to one page and people without collateral are allowed to leave their grade-school diplomas or wedding certificates as collateral.

Customers of rival lenders who can’t sign their names are allowed to use a fingerprint-scanning system, though some farmers’ fingers are so calloused the readers can’t scan them.

When borrowers balked at paying monthly or quarterly installments, Mandiri started collecting daily, sending employees to the neighborhood market in the morning to collect.

“It’s a great way to get them to pay on time,” Mr. Suhedi said.

Within four months of opening late last year, his branch was profitable and was collecting more savings than it was lending out. It now accumulates more cash in one day than some regular branches.

Mandiri plans to expand the number of microlending outlets it has to 2,300 in the next three years from around 1,500 today.

The bank also increased its war chest for loan expansion with a rights issue of shares that raised more than $1 billion.

Its total microlending, which was nothing 10 years ago, is now close to $1 billion.

At Danamon, microlending was less than 5% of its loan book six years ago. It is now headed toward 25%. The bank has developed mobile branches that work out of cars rather than an office.

Produce-stand owner Nurjanah has been in the business for more than 20 years and never had a bank loan. If she needed money, she went to a loan shark.

Now she has $2,500 in loans from Mandiri that helped her to purchase more bananas than she would normally buy.

She said her profit is better because she got a better price by buying more and that she never would have taken the loan if she had to go to a branch to make payments.

“I am a 24-hour business. As long as there are customers I am open,” she said, passing a customer a plastic bag full of red chilies. “When there is a lull, I sleep here.”